Wednesday, May 4, 2011

The 'Marginal Cost' Mistake

Prof Clayton Christensen in HBR

"Weʼre taught in finance and economics that in evaluating alternative investments, we should ignore sunk and fixed costs, and instead base decisions on the marginal costs and marginal revenues that each alternative entails. We learn in our course that
this doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities theyʼll need in the future. If we knew the future would be exactly the same as the past, that approach
would be fine. But if the futureʼs different—and it almost always is—then itʼs the wrong thing to do.
This theory addresses the third question I discuss with my students—how to live a life of integrity (stay out of jail).
Unconsciously, we often employ the marginal cost doctrine in our personal lives when we choose between right and wrong. Av oice in our head says, “Look, I know that as a general rule, most people shouldnʼt do this. But in this particular extenuating
circumstance, just this once, itʼs OK.” The marginal cost of doing something wrong “just this once” always seems alluringly low.
It suckers you in, and you donʼt ever look at where that path ultimately is headed and at the full costs that the choice entails.
Justification for infidelity and dishonesty in all their manifestations lies in the marginal cost economics of “just this once.”